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Past Performance Report
John Smith #1815 - Survey filled 22 Jan 2019Purpose of This Report
This report is intended to provide you with a realistic picture of how a portfolio, which has been customised for you, has performed over time. The portfolio has been put together based on your survey responses and input from your financial advisor. It is designed to balance your return requirements with your tolerance for market volatility or ‘ups and downs’.
You have been placed in Risk Group 5, which is composed of 60% stocks, 30% bonds and 10% cash. This is A balanced asset allocation with moderate to high volatility and return and will be referred to as 'Your Portfolio' for the remainder of this report.
Setting Realistic Expectations
Starting with realistic expectations of your investment returns is important, as your experience will depend on how you expect your investments to perform over time.
Investors in Risk Group 5 are typically comfortable losing 33% of their portfolio value in a given year in the event of a serious downturn. In exchange for this risk, they generally expect their portfolio to return 2 times the rate that risk free assets, such as Certificate of Deposits, return over the same period.
The remainder of this report is laid out in the following sections
Return Expectations
Looking at your portfolio's historical returns
Risk Perception
In depth experience of market downturns
Long Term Investing
Market resilience and wealth creation
Important Terms:
Your Portfolio = Risk Group Portfolio 5
60% stocks, 30% bonds and 10% cash
Good = Top 5%
Poor = Bottom 5%
Recent = Since 1998
Historical = Since 1970
Real Return = Inflation adjusted
Nominal Return = Straight price return -
Relative Portfolio Returns
Expected vs. Actual Return
Figure 1 shows the recent 10 year annualised return of Your Portfolio vs Certificates of Deposits (CDs). On average, this portfolio returned 2.1 times the rate of CDs. This means that if CDs returned 2% in an average year, this portfolio would have returned 4.2% in the same year. Historically the 10 year annualised return for CDs has been 5.8% and recently 2.0%.
The pie charts illustrate how Your Portfolio would have performed against 3 investors with different expectations of return (Figure 2). For an investor who expected their portfolio to return 2.0 x CDs, this portfolio would have met their expectations 30% of the time and exceeded expectations 28% of the time.
Portfolio vs CDs return multipleAverage 2.1x
Figure 1
Portfolio vs 1.5x CD
58% Exceeded
17% Met
25% Failed
1.5xCDPortfolio vs 2.0x CD
28% Exceeded
30% Met
42% Failed
2.0xCDPortfolio vs 2.5x CD
16% Exceeded
12% Met
72% Failed
2.5xCDFigure 2
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Absolute Portfolio Returns
Nominal Historical Returns
Historical returns for Your Portfolio over various time periods are shown in Table 1. The numbers illustrate that over a 1 year period returns show larger variability, ranging from -27.96% to +44.23%, than over a 10 year period. Over longer time horizons, the range of returns becomes more predictable and more positive.
Real Historical Returns
While nominal returns provide us with an estimate of the percentage change we would have seen in a given year, the real rate of return differs due to inflation. Inflation adjusted returns provide a truer representation of what we can purchase with a given basket of investments over time.
Table 2 shows the inflation adjusted returns for Your Portfolio over various time periods. Similar to nominal returns, less variability is seen over 10 years than 1 year, as illustrated in Figure 3.
In a positive inflation environment, inflation adjusted returns will always be lower than their nominal counterparts; note that the 10 year average nominal return rate was 9.53%, while the real return rate was 5.37%. This is because inflation has 'eaten away' at the portfolio’s real spending power.
Historical Annualised % Return- ♦BEST
- ◼GOOD
- ◼AVERAGE
- ◼POOR
- ♦WORST
NominalRealFigure 3
Real Recent Returns
The historical information presented so far has been based on market performance since 1970. Recent returns, over the past 20 years, have been more subdued (Table 3).
Over a 10 year period, the average recent return was 2.8% per year compared to the historical 10 year average of 5.37%. With this lower average, there has also been a tighter range between the best and worst returns for most investment horizons.
Risk Perception
Sensitivity To Risk
Your sensitivity to fluctuations in your investment portfolio will be affected by a range of factors. Your risk tolerance, as outlined in your risk profile, is one such factor. The frequency that you check your portfolio, how closely you follow market news and your understanding of how the market moves are other factors.
In the next section, information is provided to illustrate how your portfolio could fluctuate in value and how this may look and feel from your perspective as the investor.
Loss Comfort Vs. Greatest Loss
Investors in Risk Group 5 are typically comfortable with a 33% loss in their investments over a 1 year period, keeping in mind that this loss will eventually be regained in time. In the historical period, the greatest 1 year loss for this portfolio was 28%, which occured in 2008.
This downturn was accompanied by the biggest peak to trough fall in the period analysed. This market event will be looked at in more detail in the following sections.
Loss Comfort33%Greatest Loss28%Figure 4
Rises and Falls
Largest Rises & Greatest Falls
The five greatest rises and falls for your portfolio over the historical period are presented in Tables 4 and 5. As can be seen, the greatest market rises typically ran for at least double the time as the greatest market falls. These numbers illustrate two distinguishing features of the market: falls typically occur more quickly than gains and the market takes time to recover from shocks.
The largest rise started in 1984, lasted 25 months and saw this portfolio increase in value by 61.72%. The greatest fall saw this portfolio decrease in value by 31.62%, began in 2007 and lasted 20 months. We examine this fall in greater detail in Loss Experience.
Frequency of Returns
While above we illustrated the extremes of the return range, Figure 5 is a more characteristic image. The darker areas in the distribution below show the most frequent observations. Most return periods are short and represent a small positive or negative return.
% Returns vs. Months in StageFigure 5
Monthly ReturnsFigure 6
Rising, Recovering, Falling
Figure 6 shows the proportion of time that Your Portfolio was rising, falling and recovering over the historical period. As can be seen, 41% of months were classified as rising, meaning the monthly return was higher than the all time high. Another 25% of months were classified as recovering, meaning the monthly return was higher than the recent low point, but not yet above the all time high.
The less often you view your portfolio, the more likely you will be to miss short term lulls in performance and the more positive it will appear. If you checked your portfolio monthly, 41% of the time would be rising, whereas if you only checked once a year this would jump to 75%.
Rising Periods-
41
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58
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68
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75
Loss Experience
Long Term Investing
End Values
The end value of your portfolio is the amount of money in real or inflation adjusted terms that is available to spend. Tables 6 and 7 illustrate these ending values for a $500,000 initial investment.
Over a 10 year historical period, given average market conditions, Your Portfolio would have grown to $890,510. In the recent period, however, the average 10 year ending value would have been $669,365.
1 yr 2 yr 3 yr 5 yr 10 yr Best $703,832 $785,010 $892,331 $1,185,989 $1,514,868 Good $616,901 $713,695 $807,022 $999,932 $1,415,866 Average $528,034 $556,925 $587,033 $660,767 $890,510 Poor $432,059 $407,053 $411,561 $426,608 $418,706 Worst $334,423 $321,768 $354,024 $367,388 $351,465 Historical real annualised end values - Table 6
1 yr 2 yr 3 yr 5 yr 10 yr Best $667,508 $733,761 $763,526 $924,453 $855,077 Good $578,334 $631,883 $683,220 $783,999 $800,301 Average $517,833 $534,243 $553,191 $602,427 $669,365 Poor $428,789 $394,333 $413,424 $465,020 $460,014 Worst $361,610 $349,447 $369,279 $385,400 $391,629 Recent real annualised end values - Table 7
Savings Plans
Tables 8 and 9 illustrates the amount you would have saved if you had invested $100 each month, given different time horizons and market conditions. The contributions are in real terms, meaning they increase each month in line with inflation.
If you had invested $100 each month for 10 years, then based on the average recent return rates, this investment would have grown to $15,395. Similar to the previous analysis, this value is less than the historical average return of $19,294.
1 yr 2 yr 3 yr 5 yr 10 yr Best $1,425 $3,073 $5,035 $10,122 $25,506 Good $1,342 $2,925 $4,722 $9,132 $24,159 Average $1,252 $2,622 $4,115 $7,550 $19,294 Poor $1,151 $2,293 $3,519 $6,259 $13,556 Worst $1,041 $2,121 $3,297 $5,772 $12,431 Historical real savings projection - Table 8
1 yr 2 yr 3 yr 5 yr 10 yr Best $1,388 $2,967 $4,611 $8,640 $17,057 Good $1,297 $2,734 $4,297 $7,893 $16,717 Average $1,231 $2,528 $3,897 $6,914 $15,395 Poor $1,131 $2,216 $3,442 $6,181 $13,045 Worst $1,041 $2,121 $3,297 $5,772 $12,431 Recent real savings projection - Table 9
Variability of results
Investment scenarios have thus far been categorised as good, average or poor. Figures 7 and 8 present the full distribution of 10 year real annualised returns, showing that the distribution of returns in the recent period has a lower average and a wider distribution than the historical period. This should be considered in the context of greater observations in the historical period.
Historical Real 10 Year Return FrequenciesAverage 5.4%
Figure 7
Recent Real 10 Year Return FrequenciesAverage 2.8%
Figure 8
